Miami Seeking Budget Relief Courts Commercial Developers Abroad

July 12 (Bloomberg) -- Miami is looking abroad for
developers to revive its commercial real-estate market, counting
on revenue from new projects to relieve a fiscal hangover left
by the collapse of residential prices.

Asian companies are behind the two biggest commercial
ventures this year. Hong Kong-based Swire Pacific Ltd. got
initial approval June 23 for Brickell CitiCentre, $700 million
of retail, hotel, residential and office space. Genting Malaysia
Berhad agreed in May to pay $236 million for the Miami Herald
newspaper headquarters owned by McClatchy Co. It plans a $3
billion waterfront resort and casino for the 14 acres.

The Swire project alone will bring Miami as much as $2
million in permit fees in the next year and, eventually, annual
property taxes of $5.5 million, Mayor Tomas Regalado said in an
interview. The city of about 400,000 people can use the money:
it faces a projected 2012 budget deficit of about $54 million
and possible employee furloughs amid declining revenue.

Miami “will have no fear of being broke in the next five
to 10 years,” said Regalado, 64, who visited Taiwan in May.
City officials plan a Peru trade trip by November. “We’ll be
presiding over the next boom of the city of Miami with all these
mega projects.”

The city’s bond rating was cut by the three major credit
evaluators last month after shrinking revenue opened operating
deficits in five of six fiscal years through 2010. Tax income
fell as home prices tracked by an S&P/Case-Shiller index plunged
51 percent through April from a 2006 peak.

Signs of Life

Commercial property is showing signs of life as overseas
buyers purchased $447.9 million worth in the first six months of
2011, according to Real Capital Analytics Inc., a New York-based
researcher. That’s almost 10 times the $48.1 million in all of
2010 and twice the $209.5 million in 2009.

“The large-scale projects indicate the interest to stay in
the market a significant amount of time,” he said in a
telephone interview. “I think of Miami more along the lines of
a San Francisco or Manhattan.”

Among other deals this year: Cube Capital, a London-based
investment fund, said in April it and InSite Group, a Weston,
Florida-based investment firm, paid $61 million for the
Continental Oceanfront South Beach Hotel in Miami Beach. RREEF,
the real-estate investment-management unit of Deutsche Bank AG,
paid $95.2 million in January for a shopping mall in West
Kendall, outside central Miami.

Continued Development

Even after the end of Miami’s condo explosion, in which
22,000 units were built from 2003 to 2008 as home prices
doubled, developers continued to construct offices. The central
business district got 1.23 million square feet (113,800 square
meters) of office space since the third quarter of 2008, an 11
percent increase, according to Jones Lang LaSalle Inc., a
Chicago-based real-estate services company.

The district’s office-vacancy rate was 22 percent at the
end of June, with 2.86 million square feet empty, according to
Jones Lang. That compares with 12 percent in midtown Manhattan
and 17 percent in Chicago.

Business-district rents dropped to $35.35 a square foot in
June, down 13 percent from a peak in the third quarter of 2008,
Jones Lang said June 30. Actual leases are as much as 30 percent
cheaper when concessions such as free rent are included, said
Richard Schuchts, senior vice president at Jones Lang in Miami.

Job Growth Needed

Absorption of space and price increases won’t happen until
job growth returns, especially in the financial, legal and
insurance industries that occupy prime space, Schuchts said. The
Miami-Fort Lauderdale area’s unemployment rate was 11.4 percent
in May, exceeding the 9.1 percent national rate that month,
according to the Labor Department.

The office market now is “like musical chairs,” with new
buildings cutting rents to pull tenants from older ones,
Schuchts said.

“There are law firms in new buildings, but there’s the
same number of lawyers,” he said in a telephone interview.
“Financial services are just moving around.”

The $300 million 40-floor tower at 600 Brickell Ave. in the
financial district, which opens in August, has leased only
20,000 of its 600,000 square feet, said Tracy Story, president
of management and leasing at the Foram Group Inc., the
building’s Miami-based developer.

Lease Talks

The first tenant is French bank Credit Agricole SA. Leases
totaling another 300,000 square feet are being negotiated, with
many prospective clients from international companies, Story
said. The widening of the Panama Canal in 2014 will attract more
Asian trade and investment, she said.

Overseas demand is helping the residential market recover,
said Jorge Perez, chairman of Related Group of Florida, the
state’s largest condo developer.

Sales of Miami homes and condos climbed 61 percent this
year through May to 10,439 units, according to Florida
Association of Realtors data. Condo prices fell 1 percent in May
to a median $124,300, the smallest decline from a year earlier
since June 2008.

“While office is showing oversupply, the big oversupply of
residential was two years ago,” Perez said in a telephone
interview from Miami. “That’s been largely consumed by foreign
buyers, who are either keeping them as second homes or renting
them for investment.”

Commercial Venture

Related, which wrote down $1 billion of condo losses in
2008, invested in commercial property through a partnership that
paid $100 million in May for the $161 million senior promissory
note on Miami’s Omni Mall and Hilton Downtown hotel, which faced
foreclosure.

“We have no assurance it’s going to happen,” Iarossi said
in a telephone interview. “They’re going to have their work cut
out for them to win that license, and they could be left with a
very, very expensive piece of property.”

Genting, which owns 50 percent of Miami-based Norwegian
Cruise Line Ltd., will develop the Herald site for long-term
growth with or without a gaming license, said Neisen Kasdin, a
Miami-based land-use and entitlement attorney for the company.

Asia Equivalent

“They view Miami as the Singapore or Hong Kong of the
Americas,” said Kasdin, who is with Akerman Senterfitt LLP and
is vice chairman of the Downtown Development Authority.

Swire, which developed Miami’s Brickell Key in the 1980s,
is planning the five-million-square-foot CitiCentre for 2015,
not today’s market, said Megan Kelly, senior vice president of
the U.S. unit. CitiCentre’s first phase will be mostly retail
and hotel space, which is more in demand than offices and
condos, she said.

Downtown Miami’s retail vacancy rate was 3.6 percent in the
second quarter, according to CoStar Group Inc., a real-estate
information company in Washington. The occupancy rate of Miami-area hotels was 79 percent in the first five months of 2011, up
from 69 percent two years earlier, according to Smith Travel
Research Inc.

“If you’re selling eight of every 10 rooms, that implies
there’s more room for growth,” Jan Freitag, vice president at
Smith Travel, said in a telephone interview from Hendersonville,
Tennessee. “Miami, because of its geographic location, attracts
leisure, business and international travelers. It’s very, very
hard to compare with other markets.”